GIFT  OF 


GIFT 
SFP  20  191* 


SOME  PHASES  OF  FINANCE  DURING 
THE  GREAT  WAR 


GAEL  C.  PLEHN 


[Reprint  from  the  UNIVERSITY  OF  CALIFORNIA  CHRONICLE,  Vol.  XVIII,  No.  3] 


6USIX 


ff 


SOME  PHASES  OF  FINANCE  DURING  THE 
GREAT  WAR.* 


GAEL  C.  PLEHN. 

In  this  paper  the  finances  of  the  great  war  will  be 
approached  from  two  different  sides  or  points  of  view. 
From  one  point  of  view  we  shall  seek  to  see  a  few  of  the 
effects  on  the  money  market,  on  foreign  exchange,  on  bank- 
ing, private  investment  and  commercial  credit;  from  the 
other  we  shall  view  the  work  of  the  finance  minister  in 
raising  the  vast  sums  which  are  needed  to  pay  for  muni- 
tions, for  men  and  for  the  hire  of  "allies."  War  finance, 
however,  is  not  a  flat  shield  with  two  sides  only,  one  of 
gold  and  silver  and  the  other  of  blood  and  iron.  There 
are  other  sides  and  many  angles.  But  the  two  mentioned 
are  the  only  ones  we  shall  have  space  for,  and  only  small 
parts  of  these  can  be  viewed. 

All  through  a  long,  dreary  afternoon  on  the  last  Friday 
in  July,  1914,  a  long  string  of  "straw  'atted  'Arries," 
mostly  in  holiday  attire,  filed  slowly  into  and  out  of  the 
Bank  of  England,  covertly  resenting,  but  trying  to  appear 
unconscious  of  the  jibes  and  jeers  of  a  crowd  of  the  curious, 
mostly  likewise  dressed  for  the  holidays,  who  had  been 
attracted  by  the  novel  sight  and  who  had  gathered  on 
the  steps  of  the  Royal  Exchange  across  the  way.  This 
was  the  opening  scene  of  the  great  drama  of  a  world-wide 
financial  panic. 

What  brought  this  strange  mob  to  the  temple?  The 
answer  is  simple:  all  they  wanted  was  a  little  cash  to 

*A  paper  read  at  the  Berkeley  Club,  April  27,  1916. 


,-».   M  n  r> 


enable  them  to  go  away  over  the  Bank  Holiday,  that  cus- 
tomary Fall  outing  of  all  Londoners.  Yet  like  Samson, 
though  they  came  to  make  sport,  they  blindly  got  "hold 
on  the  two  middle  pillars  on  which  the  house  (of  finance) 
rested  and  pulled  the  house  down  upon  the  lords  and  all 
the  people  that  were  therein."  The  stage  setting  even  was 
appropriate,  for  the  bank  was  torn  up  for  structural 
alterations. 

A  few  thousand  pounds  of  holiday  money  from  the 
strongest  bank  in  the  world — did  ever  a  lighter  straw 
break  the  camel's  back?  What  a  load  there  must  have 
been  otherwise  if  this  featherweight  was  the  overweight. 
All  in  one  week  the  load  accumulated.  On  Friday,  July 

24,  Austria  sent  her  ultimatum  to  Servia.     Saturday,  July 

25,  there  was  a  near-panic  on  the  London  Stock  Exchange 
and  other  bourses.    All  the  next  week  the  foreign  exchanges 
were  very  queer.    But  the  old  lady  in  Threadneedle  Street 
is  slow  and  dignified,  until  she  gets  really  flustered,  and 
she  waited  the  appointed  time  for  the  regular  day,  Thurs- 
day, before  raising  the  bank  rate  of  discount  to  steady  the 
market.     On  Thursday  the  rate  was  raised  from  three  to 
four  per  cent.     According  to  precedent  this  rate  should 
have  stood  until  the  following  Thursday.     For  Thursday 
is  selected  so  that  the  effect  of  the  change  in  the  bank  rate 
may  be  seen  on  the  remoter  exchanges  during  the  follow- 
ing week.     Furthermore  the  coming  Monday  was  to  be 
the  Bank  Holiday.     But  contrary  to  all  precedents  the 
rate  went  up  on  Friday  from  four  to  eight  per  cent  and 
the  next  day  to  ten  per  cent,  after  the  visit  of  the  mob 
of  holiday  makers.    Ten  per  cent  is  the  rate  which,  accord- 
ing to  precedent,  authorizes  the  Bank  to  apply  for  the 
suspension  of  the  Bank  Act. 

"Then,"  says  Hartley  Withers,  "came  Sunday,  then 
the  Bank  Holiday,  and  war,  and  then  three  more  bank 
holidays,  and  then  the  general  moratorium. ' ' 1 

i  Hartley  Withers,  War  and  Lombard  Street.     London,  1915. 


The  events  in  chronological  sequence  tell  the  tale.  On 
Sunday,  August  2,  came  the  Royal  proclamation  "for  post- 
poning the  payment  of  certain  bills  of  exchange, ' '  to  which 
was  appended  the  usual  benediction,  ; '  God  save  the  King. ' ' 
On  Monday,  August  3,  it  was  enacted  "by  the  King's  most 
Excellent  Majesty,  by  and  with  the  advice  and  consent  of 
the  Lords  Spiritual  and  Temporal,  and  Commons,  in  this 
Parliament  assembled,  and  by  the  authority  of  the  same," 
that,  "His  Majesty  may  by  Proclamation  authorize  the 
postponement  of  the  payment  of  any  bill  of  exchange,  or 
of  any  negotiable  instrument,  or  any  payment  in  pursuance 
of  any  contract,  to  such  an  extent,  for  such  time,  and 
subject  to  such  conditions  or  other  provisions  as  may  be 
specified  in  the  Proclamation."  The  same  act  ratified  the 
Sunday  proclamation. 

But  three  special  bank  holidays  intervened,  so  that  the 
authorized  proclamation  calling  on  God  to  save  the  King 
through  a  general  moratorium  did  not  appear  until 
August  6.  Thus  a  temporary  anesthesia  fell  on  all  debts, 
except  wages,  debts  for  trivial  sums,  taxes,  maritime  freight, 
debts  due  Englishmen  by  foreigners,  dividends  and  interest, 
bank  notes,  old-age  pensions,  insurance,  workmen's  com- 
pensation, and  savings  deposits.  Cheques  and  demand  bills 
had  been  excepted  from  the  moratorium  of  Sunday,  and 
continued  exempt  until  August  12,  when  there  came  another 
proclamation  covering  cheques  and  still  further  extending 
the  moratorium.  On  September  3  the  duration  of  the 
moratorium  was  extended  another  month,  making  two 
months  in  all.  By  very  different  routes  and  legal  devices 
a  similar  moratorium  was  created  in  France,  and,  as  to 
debts  owed  by  men  called  to  arms,  in  Germany.  But  these 
we  must  omit. 

Despite  these  drastic  measures,  the  suspension  of  the 
Bank  Act,  customary  in  all  times  of  trouble,  was  authorized 
by  Parliament  on  August  6  in  the  usual  terms :  ' '  The  Gov- 
ernor and  company  of  the  Bank  of  England  .  .  .  may 
so  far  as  temporarily  authorized  by  the  Treasury,  and 


subject  to  any  condition  attached  to  that  authority,  issue 
notes  in  excess  of  any  limit  fixed  by  law."  The  Bank  Act, 
as  is  probably  known,  permits  the  Bank  of  England  to 
issue  £18,450,000  in  notes  against  what  the  government 
permanently  owes  it,  and  beyond  that  to  issue  notes  pro- 
vided it  holds  five  pounds  in  gold  against  every  five-pound 
note  it  issues.  Suspension  takes  away  the  necessity  for 
holding  gold.  Notes  may  be  issued  without  limit. 

But  on  account  of  the  moratorium  and  of  another 
measure,  to  be  noted  later,  the  suspension  of  the  Bank 
Act  was  unnecessary,  or  at  least  was  not  used  in  the  tra- 
ditional way.  The  suspension  was  in  law  only,  not  in 
fact.  The  other  measure  was  the  resort  by  the  government 
to  the  issue  of  paper  money.  This  was  a  new  currency, 
consisting  of  one-pound  notes  (called  "Bradbury's,"  from 
the  name  of  the  officer  signing  them)  and  of  ten-shilling 
notes  in  scarlet  and  known  as  the  "pink  'uns."  These 
notes  the  act  of  August  6  declared  "shall  be  current  in 
the  United  Kingdom  in  the  same  manner  and  to  the  same 
extent  and  as  fully  as  sovereigns  and  half-sovereigns  are 
current,  and  shall  be  legal  tender  in  the  United  Kingdom 
for  the  payment  of  any  amount. ' '  Thus  legally  these  notes 
are  purely  fiat  money,  although  there  is  a  provision  for 
their  redemption  in  gold  at  the  Bank  of  England  and 
there  is  an  appearance  of  a  reserve  against  them.  This  re- 
serve, however,  seems  to  be  a  sham,  as  it  came  out  of  the 
Bank 's  own  reserves.  These  notes  might  be  issued  to  banks 
up  to  twenty  per  cent  of  their  current  liabilities,  which 
placed  a  limit  of  about  225  millions  of  pounds  on  the 
issue. 

Facts  at  hand  as  yet  as  to  these  notes,  the  extent  of 
their  actual  use  and  the  like,  are  too  scanty  to  furnish  a 
means  of  judging  of  their  effect.  As  postal  money  orders 
were  made  legal  tender  at  the  same  time,  there  will  always 
be  difficulty  in  ascertaining  the  increase  in  the  circulation 
that  resulted.  But  the  very  power  to  issue  these  notes 
must,  as  Lloyd-George  claimed,  have  given  confidence. 


When  we  slip  around  to  the  other  side  of  the  shield  we 
shall  see  that  every  country  has  to  provide  in  some  way 
at  the  outbreak  of  a  great  war  for  some  such  power  to 
expand  the  circulation,  and  thus  to  levy  a  forced  loan.  It 
was,  however,  a  new  departure  for  England  to  frankly 
issue  fiat  money,  although  the  suspension  of  the  Bank 
Act  has  at  times  had  much  the  same  effect.  Every  nation 
entering  on  war  must  provide  some  means  of  counteract- 
ing the  stringency  in  the  circulation  created  by  the  panic 
tendency  to  hoard  money. 

The  events  just  chronicled  constituted  "an  unpleas- 
ant string  of  surprises,"  and  were  a  severe  blow  to  the 
pride  of  the  English  bankers.  To  understand  whence  the 
blow  came  we  may  go  back  to  our  straw-hatted  mob  on 
which  the  curtain  rose,  and  try  to  find  out  who  sent  them 
on  their  errand  of  trouble-making. 

These  people  had  cash  claims  against  the  ordinary 
joint-stock  banks.  There  were,  however,  besides  those  who 
simply  wanted  money  to  pay  their  month-end  household 
accounts  and  to  go  away  for  the  holidays,  some  other  de- 
positors of  the  joint-stock  banks  who  had  become  panic- 
stricken  by  the  prospect  of  war,  and  wanted  money  to 
hoard.  This  is  a  stupid  thing  to  do,  but  selfish  people  in 
a  panic  always  do  it.  Some  people  in  England,  in  the 
same  sort  of  panic,  rushed  to  the  provision  dealers  and 
bought  great  stores  of  food  to  put  away  in  their  houses, 
lest  famine  should  immediately  stalk  abroad  in  the  land. 
That  such  action  raised  the  price  of  food  and  promptly 
brought  out  new  supplies  was  a  very  opportune  result. 
But  this  sort  of  a  demand  for  money  cannot  of  itself  call 
out  new  supplies  of  money. 

The  banks  were  thus  confronted  with  possible  runs. 
How  many  of  their  customers  clamoring  for  cash  wanted 
it  for  legitimate  and  holiday  purposes  they  could  not  tell. 
So  some  of  the  banks  paid  out  only  Bank  of  England  notes 
and  told  their  customers  to  take  these  notes  to  the  Bank 
of  England  to  get  the  gold.  This  was  bad  policy.  But 


a  banker  is  naturally  timid  and  few  living  English  bankers 
had  had  any  experience  with  runs.  Moreover,  things  finan- 
cial were  at  the  moment  all  very  queer.  The  Bank  of 
England  cheerfully  shovelled  out  sovereigns  as  fast  as  it 
could.  But  still  the  whole  procedure  was  so  weird  and 
uncanny  as  to  intensify  unrest.  A  run  on  the  Bank  of 
England — of  all  things ! 

There  are  two  sources  to  which  the  English  bankers 
can  turn  to  draw  funds  for  such  dire  needs  as  these.  One 
is  the  great  stream  of  money  always  restlessly  flowing 
hither  and  yon  in  the  channels  of  trade,  but  which,  wher- 
ever it  goes,  is  always  pumped  through  London.  The  other 
is  the  great  reservoir  of  money  investments.  During  the 
week  from  the  24th  to  the  31st  of  July  the  banks  drew 
madly  on  both  these  sources.  But  after  our  holiday-makers 
appeared  at  the  Bank  the  flow  from  both  of  them  dried  up. 

All  the  world  owes  England  in  times  of  peace.  Why 
couldn't  she  then  call  in  her  money?  One  reason,  of 
course,  was  that  the  rest  of  the  world  was  to  a  large  extent 
in  a  panic  too.  But  there  was  the  further  reason  that 
by  her  own  acts  she  had  cut  off  the  means  of  remittance, 
save  and  except  the  slow,  uncertain  and  unusual  one  of 
the  physical  shipment  of  gold,  and  gold  was  not  every- 
where to  be  had,  nor  ships  to  carry  it. 

Foreign  exchange  is  a  chain  of  payments.  Break  a 
link  anywhere  and  it  will  not  hold.  To  pay  money  to 
someone  in  England  I  must  ordinarily  find  someone  here, 
or  in  New  York,  or  in  Hongkong,  or  elsewhere,  who  has 
money  due  him  from  someone  in  England,  or  to  whom 
someone  in  England  will  lend  money.  But  if  every  debtor 
in  England  is  privileged  not  to  pay,  and  nobody  in  Eng- 
land will  or  can  lend,  there  is  nobody  in  my  part  of  the 
world,  or  in  any  part,  that  I  can  reach,  who  can  draw  a 
bill  on  England  that  I  can  buy,  and  under  those  circum- 
stances, with  the  best  of  intentions  in  the  world  and  of 
ability  otherwise,  I  cannot  pay. 

With  the  prospect  then  that  they  could  not  collect  what 


was  due  them,  the  bankers  of  England  feared  that  they 
could  not  pay  what  they  owed,  and  in  refusing  to  pay  they 
again  destroyed  what  little  chance  they  had  to  collect.  Had 
there  been  outside  of  the  belligerent  nations  another  money- 
pumping  plant  large  enough  to  stand  the  strain,  the  re- 
sult would  have  been  different. 

What  has  gone  before  applies  to  current  funds,  the 
great  circulation  of  money  which  is  pumped  constantly  by 
the  heart,  London,  through  the  arteries  of  trade. 

But  why,  you  will  ask,  could  not  England  realize  on 
her  investments,  her  long-time  loans  which  cover  the  earth 
—why  could  she  not  sell  to  somebody,  at  some  price  or 
other,  the  foreign  securities  she  owned?  During  that 
momentous  week  she  did  so  desperately  and  drew  in  large 
sums.  That  was  what  caused  the  near-panic  on  the  ex- 
changes on  July  25,  or  at  least  it  was  what  contributed 
largely  to  it.  It  was  fortunate,  in  a  way,  that  July  25  was 
a  Saturday  and  that  the  exchanges  had  a  chance  to  catch 
their  breath  over  Sunday.  It  gave  them  nearly  a  week  of 
respite.  It  was  this  selling  that  kept  the  exchanges  jump- 
ing so  strangely  all  that  week.  That  selling  dropped  con- 
sols, usually  as  good  as  gold  and  fluctuating  only  with  the 
rate  of  interest,  in  one  week  from  75%6  to  69%,  the  new 
French  3%'s,  not  yet  all  issued  (and  artificially  four  times 
over-subscribed)  down  to  85,  the  Canadian  Pacific  from 
1883/4  to  1571/2,  Union  Pacific  from  160%  to  145%,  and 
so  on.  But  the  stock  exchanges,  fearing  sacrifices  of  securi- 
ties on  a  scale  that  would  spread  ruin  and  cause  a  general 
liquidation,  closed  their  doors,  one  after  another  all  over 
the  world. 

This  is  remarkable  evidence  of  the  interdependence  of 
the  different  parts  of  the  financial  world.  It  is  no  light 
matter  to  close  the  stock  exchanges.  Doing  so  puts  the 
banks  especially  in  a  hole.  The  New  York  Stock  Exchange, 
that  flood-gate  which  controls  the  big  reservoirs  of  invest- 
ment capital  through  which  normally  one  can  turn  an 
assured  income  into  capital  or  capital  into  income  on  any 


10 


day  except  Sunday  or  a  holiday,  has  closed  its  doors  but 
twice  in  the  century  or  more  of  its  existence.  The  first 
time  was  in  1870,  for  ten  days,  and  the  second  time  in 
1914,  for  nearly  six  months.  Mr.  Noble,  the  president  of 
the  exchange,  says  of  this  occasion : 

On  that  eventful  date  (July  25)  a  financial  earthquake  of  a 
violence  absolutely  without  precedent  shook  every  great  center 
of  the  civilized  world,  closing  their  markets  one  by  one  until 
New  York,  the  last  of  all,  finally  suspended  in  order  to  forestall 
what  would  have  surely  been  a  ruinous  collapse.  .  .  .  Up  to 
the  final  movement  of  the  launching  of  ultimata  between  the  European 
governments  no  one  thought  it  possible  that  all  our  boasted  bonds 
of  civilization  were  to  burst  over  night  and  plunge  us  back  into 
medieval  barbarism.  Wall  Street  was  therefore  taken  unawares, 
and  so  terrific  was  the  rapidity  with  which  the  world  passed,  in 
the  period  of  about  a  week,  from  the  confidence  of  long-enduring 
peace  to  the  frightful  realization  of  strife,  that  no  time  was  given 
for  men  to  collect  their  thoughts  and  decide  how  to  meet  the  on- 
rushing  disaster. 

Added  to  the  paralyzing  effect  of  this  unheard-of  speed  of 
action,  there  came  the  disconcerting  thought  that  the  conditions 
produced  were  absolutely  without  precedent.  Experience,  the 
chart  on  which  we  rely  to  guide  ourselves  through  troubled  waters, 
did  not  exist.  No  world-war  had  ever  been  fought  under  the 
complex  conditions  of  modern  industry  and  finance,  and  no  one 
could,  for  the  moment,  form  any  reliable  idea  of  what  would 
happen  or  of  what  immediate  action  should  be  taken.  .  .  . 

The  conditions  on  the  stock  exchange,  when  the  storm  burst, 
were  in  some  respects  very  helpful.  Speculation  for  several  years 
had  been  at  a  low  ebb,  so  that  values  were  not  inflated  nor  com- 
mitments extended.  .  .  .  Furthermore,  the  unsettled  business 
outlook  due  to  new  and  untried  legislation  had  fostered  a  heavy 
short  interest  in  the  market,  thereby  furnishing  the  best  safe- 
guard against  a  sudden  and  disastrous  drop.  .  .  . 

To  close  the  recognized  public  market  for  securities,  the  mar- 
ket which  is  organized  and  safeguarded  and  depended  upon  as 
a  standard  of  values,  is  an  undertaking  of  great  responsibility 
in  any  community.  To  take  this  step  in  New  York,  which  is 
one  of  the  four  pre-eminent  financial  centers  of  the  world,  in- 
volved a  responsibility  of  a  magnitude  difficult  adequately  to 
estimate.  Upon  the  continuity  of  this  market  rest  the  vast 
money  loans  secured  by  the  pledge  of  listed  securities;  number- 
less individuals  depend  upon  it  in  times  of  crisis  to  enable  them 


11 


to  raise  money  rapidly  by  realizing  on  security  investments  and 
thus  safeguarding  other  property  that  may  be  unsalable;  the  pos- 
sessor of  ready  money  looks  to  it  as  the  quickest  and  safest  field 
in  which  to  obtain  an  interest  on  his  funds;  and  the  business 
world  as  a  whole  depends  upon  it  as  a  barometer  of  general  con- 
ditions.2 

No  wonder  the  New  York  Stock  Exchange  hestitated. 
Could  it  stand  alone  and  carry  the  world's  credit? 
Bankers  naturally  insisted  that  it  should  try.  Here  again 
the  vacation  times  of  the  Summer  days  played  a  part. 
Many  of  the  brokers  and  even  of  the  governors  were  away. 
It  was  not  until  four  minutes  of  ten  o'clock  on  the  fatal 
day  that  the  final  decision  not  to  open  at  ten  was  reached. 
Even  then  the  decision  was  not  unanimous.  The  exchange 
did  not  reopen  until  December  15  for  all  lines  of  business. 

The  bourses  of  Vienna  and  Budapest  were  the  first  to 
close,  and  that  was  on  July  27.  Brussels  followed  suit  the 
same  day.  Paris  also  virtually  ceased  trading  that  day  by 
a  sort  of  unanimous  consent.  On  July  30  the  members  of 
the  ' '  Coulisse, ' '  the  less  official  part  of  the  Bourse,  formally 
decided  to  quote  no  prices  for  forward  business,  which 
with  them  means  delivery  in  more  than  forty-eight  hours. 
The  agents  de  change  continued  to  meet  in  the  " parquet." 
Formal  complete  closing  came  July  31.  On  Tuesday  the 
Montreal  and  Toronto  stock  exchanges  closed  their  doors. 
On  Wednesday  all  account  business  on  the  Bourse  in  Berlin 
and  all  settlements  on  the  bourses  of  Hamburg  and  Frank- 
fort were  suspended.  The  same  day  the  exchanges  at  St. 
Petersburg,  Antwerp,  Amsterdam,  Liverpool  and  all  South 
American  cities  closed.  Eome  and  Milan  suspended  all 
dealings  in  forward  business  the  next  day.  Friday,  July 
31,  London,  Berlin,  Paris,  and  at  the  last  minute  New 
York,  closed  their  stock  exchanges  and  all  dealings  in 
securities,  which  except  in  New  York  had  been  nominal  for 
several  days,  were  formally  at  an  end. 

2  H.  G.  S.  Noble,  The  New  York  Stock  Exchange  in  the  Crisis  of 
1914.  Garden  City,  New  York,  1915. 


12 

The  closing  of  the  stock  exchanges  hit  the  banks  in 
England  in  two  ways.  They  could  not  exchange  their  own 
securities  for  cash,  nor  could  they  collect  from  their  cus- 
tomers, stock-brokers  and  others  by  the  sale  of  collateral. 
Their  liquid  assets  became  frozen.  These  grim  facts  are 
enough  to  explain  why  the  holiday-makers  were  driven  to 
Threadneedle  Street. 

For  the  further  effects  we  may  follow  for  a  moment 
the  fortunes  of  another  set  of  actors.  These  are  the  bill- 
brokers.  They  were  the  one  set  of  persons  whom  the  banks 
had  fully  in  their  power.  These  gentlemen  buy  bills  of 
exchange  as  they  come  in  from  all  parts  of  the  world  and 
pay  for  them  with  money  that  they  borrow  from  the 
banks.  They  make  their  living  from  the  difference  between 
what  they  pay  the  banks  and  the  rate  of  discount  at  which 
they  buy  the  bills,  and  they  usually  borrow  on  call  or  for 
very  short  terms.  In  normal  times  it  is  a  very  safe  busi- 
ness. They  can  pay  on  call,  because  their  assets  are  always 
salable.  The  payment,  when  due,  of  a  bill  of  exchange 
rests,  in  the  last  analysis,  on  the  fact  that  men  eat,  drink, 
wear  clothes,  sit  in  chairs  and  so  on,  with  commendable 
regularity.  Hence,  when  a  shipment  of  flour  goes  to  Eng- 
land, it  is  a  certainty  that  it  will  eventually  become  bread 
and  be  paid  for  and  eaten.  The  means  of  payment,  the 
bills  of  exchange,  rest  on  the  regular  continuance  of  such 
shipments.  That  is,  each  shipment  of  flour  must  be  fol- 
lowed by  another,  each  shipment  of  cotton  by  another. 
Moreover,  cargoes  going  in  one  direction  must  be  passed 
by  cargoes  going  in  the  other  direction.  Cloth,  knives  and 
what-not  pay  for  the  flour.  There  are,  however,  always 
temporary  inequalities  in  the  shipments  going  in  the 
different  directions.  Cargoes  go  west  at  one  time  of  the 
year  and  east  at  another.  The  inequalities  are  evened  by 
the  bill-brokers,  who,  through  their  correspondents,  comb 
the  marts  of  the  world  for  bills  to  buy  and  sell,  and  thus 
offset  a  deficit  in  one  place  by  a  surplus  in  another.  But 
there  are  times  and  places  where  the  inequalities  are  per- 


13 


sistent  and  these  are  evened  by  the  use  of  finance  bills, 
which  are  artificial  bills  of  exchange  drawn,  not  against 
goods  sold,  but  against  money  lent.  At  the  bottom  a 
finance  bill  represents  money  advanced  by  centers  rich  to 
centers  poor  in  capital  to  trade  with.  But  while  resting 
on  the  flow  of  trade  in  their  outer  form,  they  really  mean, 
looked  at  in  the  long  run,  since  they  are  regularly  renewed, 
an  advance  or  loan  of  money  for  a  rather  long  period — in 
effect,  an  investment  loan,  but  callable.  Thus,  Sweden  and 
Norway,  for  example,  usually  have  a  good  deal  of  money 
advanced  in  this  way  by  the  London  bankers.  The  reason 
for  that  is  that  in  those  countries  capital  can  find  better 
use  in  development  of  natural  resources  than  in  trade, 
while  the  London  capitalist  is  content  with  the  smaller 
return  of  capital  in  trade. 

Now  the  moratorium  suspended  all  outgoing  bills,  com- 
modity bills  as  well  as  finance  bills.  No  one  in  England 
was  obliged  to  pay,  and  hence  no  one  would  lend.  The 
poor  bill-broker  had  in  his  hands  paper  that  he  could  not 
collect  on  or  sell.  Neither  the  firms  nor  the  acceptors  were 
obliged  to  pay.  But  the  banks  said  to  the  bill-broker, 
"pay  up."  He  offered  them  his  bills,  which  everybody 
knew  would  be  good  and  be  paid  eventually,  but  they  were 
not  payable  then,  and  then  was  the  crucial  time.  So  the 
poor  bill-broker  was  in  a  bad  way.  Another  link  in  the 
chain  was  broken.  To  be  sure,  it  was  only  a  mechanism, 
but  it  was  an  important  piece  of  mechanism.  Under  these 
circumstances  the  whole  movement  of  foreign  trade  the 
world  over  was  menaced.  What  use  was  there  for  a  San 
Francisco  house  to  ship  prunes  to  London,  or  for  that 
matter  to  Amsterdam  or  Java,  if  they  couldn't  sell  the 
bill  they  drew  on  their  customer  to  get  their  money?  The 
menace  of  the  sea-raiders  to  trade  was  no  greater  than 
the  menace  of  "no  pay  if  you  do  ship."  Bills  that  would 
certainly  be  paid  in  London  despite  the  moratorium 
(mostly  freight  bills)  were  so  scarce  that  their  price  rose 
in  New  York,  for  example,  from  a  par  of  $4.866  to  $7.00. 


14 


Here  again  a  novel  remedy  was  eventually  applied. 
Hartley  Withers  tells  about  it  in  this  vivid  passage : 

Something  had  to  be  done.  The  Government  was  not  greatly 
exercised  about  the  bill-brokers,  though  failures  in  the  city  would 
have  been  an  unpleasant  accompaniment  for  the  first  round  of 
the  big  fight;  nor  perhaps  about  the  accepting  houses  for  their 
own  sake,  since  any  disaster  that  befell  them,  though  it  might 
have  frightened  the  general  public,  would  not  have  had  any  direct 
or  overt  effect  on  the  general  public's  pocket.  But  the  stability 
of  the  accepting  houses  was  of  very  great  importance  with  regard 
to  foreign  trade,  for  they  supply  much  of  the  credit  with  which 
it  is  carried  on;  and  it  was  clearly  most  important  that  nothing 
should  be  allowed  to  check  foreign  trade,  which  was  already  ham- 
pered by  high  freights,  war-risk  insurance  premiums  and  all  the 
dislocation  that  is  inevitably  involved  by  a  sudden  plunge  into 
war  on  the  part  of  five  great  European  powers,  followed  by  sev- 
eral other  peoples.  Further,  since  it  was  above  all  things  neces- 
sary that  the  joint-stock  banks  should  be  supported  and  en- 
couraged, and  since  the  joint-stock  banks  had  already  seen  all 
their  stock  exchange  investments  and  loans  against  stock  ex- 
change securities  frozen  into  immobility  when  the  stock  exchange 
closed  its  doors,  an  effort  clearly  had  to  be  made  to  make  the 
banks  feel  happier  about  their  bills  of  exchange.  And  this  was 
what  was  finally  done.  The  accepting  houses  were  not  relieved 
of  any  liability  on  their  bills.  Ultimately  they  will  have  to  meet 
them,  out  of  their  own  pockets  if  their  clients  are  still  unable 
to  remit,  but  in  the  meantime  it  was  arranged  that  the  Bank 
of  England  will  lend  them  the  money  wherewith  to  pay  them 
as  they  fall  due,  and  the  Government  guaranteed  the  Bank  of 
England  against  loss  on  this  tremendous  operation.  This  arrange- 
ment made  all  the  bills  held  by  the  joint-stock  banks  a  good 
asset,  and  incidentally  helped  the  bill-brokers. 

To  bring  this  about  it  was  first  arranged  by  procla- 
mation that  bills  accepted  3  before  August  4  should  be  re- 
accepted  for  one  month  after  their  due  date  and  on  August 
13  the  Bank  of  England,  insured  against  loss  by  the  Gov- 
ernment, began  to  discount  approved  bills,  waiving  recourse 
against  the  selling  holder.  The  bank  rate  was  then  five  per 
cent  and  two  per  cent  more  was  charged.  Out  of  the 

3  To  ' '  accept ' '  a  bill  means  to  guarantee  its  payment. 


15 


seven  per  cent  the  Government  took  two  and  one-half  per 
cent  for  the  insurance,  which  left  the  bank  only  four  and 
one-half.  This  insurance  was  no  mere  matter  of  form, 
as  on  August  18,  1915,  the  Government  assumed  £27.600,- 
000  worth  of  pre-moratorium  bills.  Some  of  this  money 
will  be  recovered. 

The  first  six  months  of  the  war  thus  saw  England, 
''John  Bull  Cohn,"  as  her  enraged  Australian  debtors 
called  her,  demanding  that  the  rest  of  the  world  "pay, 
pay,  pay  what  you  owe  me,"  and  the  rest  of  the  world 
paralyzed  to  comply,  because  she  had  cut  off  the  means 
of  payment. 

But  a  new  phase  was  rapidly  approaching.  From  the 
biggest  creditor  England  rapidly  became  a  very  heavy 
debtor.  She  steadily  collected  all  money  that  was  ripe  for 
payment,  gathered  up  hoards  of  gold  in  London,  South 
Africa  and  Montreal,  but  as  steadily  contracted  debts  for 
munitions,  for  grants  to  the  allies  and  for  the  goods  she 
had  ceased  to  manufacture  at  home.  The  tide  turned 
strong.  By  July,  1915,  it  was  no  longer  a  question  of 
how  the  outside  world  was  going  to  pay  England,  but  how 
England  was  going  to  pay  the  outside  world.  Everybody 
knows  about  the  envoys  who  came  to  New  York  seeking 
help.  The  story  has  a  strange  likeness  to  that  of  Joseph's 
ten  brothers  who  "went  down  to  buy  corn  in  Egypt,"  ex- 
cept that  the  returning  envoys  did  not  find  the  purchase 
money  in  the  sacks.  The  resulting  drop  in  exchange  was 
as  marked  as  its  former  rise. 

Was  the  moratorium  necessary?  We  shall  know  more 
about  that  later.  At  present  it  is  hard  to  tell  whether  the 
moratorium  was  more  a  political,  war  measure,  or  more 
an  economic  necessity.  How  much  did  it  do  in  the  way 
of  cutting  off  Germany's  supply  of  gold?  Could  the  strain 
have  been  met  alone  by  the  suspension  of  the  Bank  Act, 
the  issue  of  government  paper  and  the  insurance  of  ac- 
cepted bills  f  Would  not  the  subsequent  blow  to  England 's 
credit  and  the  difficulties  of  making  payment  abroad  for 


16 


munitions  and  the  like  have  been  mitigated  if  England 
had  let  her  outland  credits  stand  for  later  use?  On  all 
these  interesting  questions  we  have  too  little  light  as  yet 
and  are  too  near  the  scene  to  decide  correctly.  But  it  does 
seem  that  England  was  too  strong  financially  to  have  been 
so  terribly  flustered. 

Now,  if  you  please,  let  us  go  round  to  the  other  side  of 
the  shield.  A  Roman  was  asked  which  he  would  prefer,  a 
lump  of  iron  or  a  lump  of  gold.  He  said :  "I  will  take  the 
iron,  as  I  can  then  get  the  gold  also."  The  iron  of  war  is 
men  and  munitions,  money  is  but  the  medium  through 
which  for  convenience  we  get  them.  Given  men  and  muni- 
tions, money  can  be  had  for  the  asking.  This  is  the  whole 
philosophy  of  war  finance. 

As  things  are  done  today,  soldiers'  services,  their  food 
and  clothing,  the  shot  and  shell  they  need,  are  paid  for  in 
money.  It  was  not  always  thus.  There  have  been  eras 
when  money  was  little  used  even  in  time  of  peace,  and 
wars  in  which  it  played  a  small  and  almost  ornamental 
part.  It  helps  to  clearness  of  thought  if  we  remember  that 
money  is  only  the  medium,  if  we  fix  our  minds  on  the 
things  done  and  used,  not  on  the  money  by  which  those 
are  measured  and  recorded.  It  is  not  inconceivable  that 
a  nation  might  by  systematic  co-operation  of  all  classes  do 
all  the  things  that  are  necessary  for  the  conduct  of  war 
without  the  use  of  money  and  without  borrowing.  Before 
the  constitutional  era  borrowing  on  a  large  scale  on  the 
basis  of  national  credit  was  impossible.  Princes  pledged 
their  personal  word  and  lands  for  means  to  go  to  the  Cru- 
sades. But  a  nation's  honor  could  not  be  pledged  until 
there  was  a  representative  parliament  which  held  the 
national  honor  in  its  custody. 

The  money  from  taxes  and  loans  which  is  poured  out 
for  war  in  modern  times  is  the  exact  equivalent,  at  war 
prices,  of  the  services,  so  far  as  paid  for,  and  of  the  food, 
clothing:  and  munitions  bought.  As  to  war  prices,  the 


wages  of  the  soldiers  are  low  and  the  prices  of  other  things 
high  as  compared  with  times  of  peace.  But  barring  these 
differences  the  same  amount  of  human  energy  which  equals 
$25,000,000  a  day  spent  in  war  will  in  times  of  peace  equal 
$25,000,000  worth  of  other  goods  and  services.  The  use 
of  money  and  of  credit  facilitates  bringing  the  productive 
power  and  capital  of  every  class  to  bear  on  the  task  of 
subduing  the  enemy.  In  time  of  war  we  work  primarily 
for  the  common  ends,  while  in  time  of  peace  we  are  allowed 
to  work  primarily  for  ourselves.  A  state  of  war  is  a  state 
of  socialism,  almost  of  communism.  England  had  before 
the  war  12,000,000  men  working  for  themselves;  today  she 
has  6,000,000  of  them  working  for  the  state.  Your  true 
Socialist,  not  the  mere  trouble-maker  who  calls  himself 
such,  is  silenced  in  time  of  war,  because  he  sees  the  prin- 
ciples for  which  he  stands  in  full  operation.  Moreover  in 
time  of  war  all  class  distinctions,  the  Socialists'  bete  noire, 
fall  into  abeyance.  There  are  then  only  two  classes — the 
patriot  and  the  coward.  The  taxes  which  are  paid  for 
part  of  the  war  expenses  are  the  means  of  making  those 
able  in  a  financial  way  contribute  their  help  to  those  in 
the  trenches.  The  bonds  are  the  means  of  making  future 
tax-payers  help. 

War  borrowing  will  approach  the  limit  of  borrowing 
only  in  the  rarest  of  cases.  The  limit  of  borrowing  is 
reached  when  it  becomes  apparent  that  the  revenues  of 
the  country  will  not  be  sufficient  to  maintain  the  interest 
and  other  debt  charges.  As  a  country's  tax-revenues  are 
necessarily  a  part  of  the  income  produced  by  the  people 
and  that  income  in  turn  is  in  proportion  to  the  nation's 
capital  resources  plus  its  labor  power,  the  ultimate  limit  is 
the  same  whether  the  borrowing  be  done  at  home  or  abroad, 
or  (what  is  the  same  thing)  whether  the  munitions  be  made 
at  home  or  abroad — with  this  difference,  that  the  margin 
required  by  a  foreign  creditor  may  be  larger  than  that  re- 
quired by  the  home  lender.  Informally  expressed :  Brother 
Will  may  lend  to  Brother  Tom  up  to  eighty  per  cent  of 


18 


the  value  of  Tom's  property,  but  a  banker  will  not  lend 
beyond  sixty  per  cent.  There  is,  of  course,  the  further 
difference,  that  if  "Will  forecloses  the  property  remains  in 
the  family.  The  effective  limit  to  war  borrowing  is  the 
power  of  the  government,  the  parties  in  power,  to  compel 
obedience  and  enforce  the  collection  of  taxes. 

Since  the  services  rendered  and  the  goods  used  are  ren-' 
dered  and  made  in  a  comparatively  short  space  of  time, 
and  since  they  can  be  duplicated  in  value  in  the  same 
space  of  time,  and  since  the  debt  can  never  exceed  capital 
resources,  there  can  be  no  such  thing  as  an  economic  neces- 
sity for  repudiation  of  war  debts,  unless  a  devastating  war 
destroys  a  very  large  part  of  the  people  of  that  nation. 
From  five  to  six  times  the  annual  savings  of  the  people 
during  the  pre-war  period  would  pay  the  total  costs  of 
this  great  war  for  two  years,  and  the  total  exceeds  the  debt. 
National  debts  have  been  repudiated,  but  for  political 
reasons,  never  for  any  economic  reasons. 

A  war  debt,  like  any  other  debt  or  credit,  is  a  means 
of  exchanging  present  goods  against  future  goods.  The 
use  of  credit  in  a  large  and  populous  country  in  time  of 
war  has  not  only  the  effect  of  distributing  the  burden 
among  all  classes,  but  it  also  has  the  effect  of  letting  a  large 
part  of  the  regular  industry  and  production  go  on  and  of 
facilitating  the  return  to  old  conditions  when  peace  comes. 

No  great  war  has  ever  ceased  for  lack  of  money  or  credit 
and  many  wars  have  gone  on  when  money  was  very  scarce. 
Our  own  Revolutionary  War  is  an  excellent  example.  The 
absence  of  money  or  credit  changes  the  form  of  doing 
things,  but  fighting  goes  on.  When  the  terrific  sacrifices 
so  gladly  made  in  time  of  war  are  over,  the  nation  returns 
to  its  old  individualistic  life  and  pays  off  the  accumulated 
war  charges  gradually  by  the  taxation  of  private  earnings. 
If  the  people  were  willing  to  continue  the  same  sacrifices 
for  a  period  of  time  equal  to  the  duration  of  the  war  they 
could  pay  the  debts  in  that  time.  But,  as  our  subject  is 
finance,  we  must  turn  from  the  substance  to  the  shadow. 


19 


All  possible  sources  of  money  for  war  must  fall  into 
one  or  another  of  the  following  nine  classes:  (1)  A  war 
chest  accumulated  in  advance,  (2)  taxes  as  the  war  goes 
on,  (3)  borrowed  money,  (4)  debasing  the  coinage,  (5) 
issuing  paper  money,  (6)  other  forced  loans,  (7)  tribute 
or  indemnities,  (8)  subsidies,  (9)  government  business 
industries. 

A  very  few  historical  illustrations  must  suffice.  Fred- 
erick the  Great  was  well  within  the  period  when  wars  were 
conducted  by  means  of  money.  He  began  in  1740  with  an 
inherited  war  chest  of  7,500,000  thalers  in  treasure  and  a 
well-organized  army.  His  money,  of  course,  had  some  five 
times  the  purchasing  power  of  money  today.  To  this  sum 
he  added  revenues  from  heavy  taxes.  But  by  1745  his 
funds  were  exhausted.  He  tried  loans  abroad,  but  in  vain. 
He  then  resorted  to  debasing  the  coinage,  to  paper  money, 
to  compulsory  loans  and  ever  more  and  more  taxes,  and 
finally  in  1758  received  a  subsidy  of  some  £670,000  annu- 
ally from  England.  By  the  time  of  his  death  he  had  again 
accumulated  a  war  chest  of  70,000,000  thalers.  His  career 
affords  an  example  of  the  use  of  all  nine  sources. 

France,  it  will  be  remembered,  wiped  out  her  ancient 
debt  when  she  wiped  out  the  ancient  monarchy  which 
created  it  and  began  after  the  revolution  with  a  clean  slate. 
Napoleon  discovered  that  he  could  take  the  conscript  sol- 
diers of  a  penniless,  bankrupt  nation  into  a  hostile  country 
and  make  war  support  war.  He  never  forgot  the  lesson 
and,  although  he  frequently  had  resort  to  heavy  taxes 
at  home,  he  seldom  borrowed.  Often  he  made  a  large  profit 
from  war.  At  his  abdication  he  left  a  debt  not  much  over 
$100,000,000.  His  career  shows  how  unessential  debt  is 
to  war. 

England  has,  however,  always  used  her  credit  heavily 
for  war  purposes.  She  could  do  this  as  she  so  early  devel- 
oped parliamentary  government.  From  1688  to  1785  Eng- 
land financed  wars  which  cost  £312,000,000  of  treasury 
funds  by  loans  and  taxes  in  about  the  ratio  of  two  to  one. 


20 


This  is  supposed  to  be  the  established  English  method. 
But  she  has  not  always  been  able  to  maintain  so  high  a 
ratio  of  taxes.  Between  1792  and  1815  she  increased  her 
debt  by  the  sum  of  £601,500,343.  In  the  same  period  she 
collected  revenues  which  at  the  end  of  the  period  were 
five-fold  those  at  the  beginning,  that  is,  they  rose  from 
£20,000,000  to  £100,000,000.  Again,  during  this  period  she 
paid  large  subsidies  to  her  allies. 

Reference  is  frequently  made  to  the  fact  that  England 's 
debt  at  the  close  of  the  Napoleonic  wars  was  relatively 
heavier  than  that  which  the  present  war  has  incurred  or 
may  entail.  That  debt  was  $4,502,180,000,  or  $224  per 
capita.  The  national  wealth  at  that  time  was  $12,500,- 
000,000,  or  $625  per  capita.  In  1914  the  national  wealth 
was  $88,000,000,000,  or  $1825  per  capita.  Hence  it  would 
take  a  debt  of  $30,476,000,000  to  equal  that  of  the  year 
1816,  without  allowing  for  the  lower  marginal  utility  of 
each  dollar  in  a  fortune  of  $1800  as  compared  with  each 
dollar  in  a  fortune  of  only  $600. 

But  this  comparison  is  a  tricky  one.  After  1816  there 
came  into  use  a  long  string  of  great  inventions,  including 
the  steam  engine,  in  all  its  applications,  wonderful  new 
methods  of  spinning  and  weaving,  new  methods  of  mining, 
etc.,  etc.,  which  in  various  industries  multiplied  man's  pro- 
ductive power  not  one  or  twofold,  but  by  the  hundredfold. 
It  was  this  unparalleled  advance  in  wealth-producing  power 
which  made  it  possible  for  England  to  carry  so  easily  the 
burden  of  debt  with  which  she  started  the  century.  Yet, 
with  all  this  tremendously  rapid  growth  in  wealth  and 
after  a  century  of  almost  continuous  peace,  Great  Britain,  as 
Rossiter  points  out,  "wealthiest  of  all  nations  of  Europe," 
still  owes  half  of  the  cost  of  attempting  to  conquer  her 
rebellious  colonies  and  all  of  the  debt  incurred  during  the 
long  Napoleonic  wars.4  Thus  little  do  people  care  for 
the  burdens  of  war,  when  war  is  over. 

^American  Economic  Review,  March,  1916,  Supplement,  p.  113. 


21 


Speculation  as  to  the  great  inventions  which  this  war 
may  bring  forth  or  force  into  use  are  fascinating.  But 
one  thing  is  clear,  and  that  is  that  to  be  a  means  of  real 
salvation  they  must  multiply  our  power  to  command  food 
products  not  by  accretions  of  a  few  per  cent,  but  by  the 
hundredfold.  Improvements  in  manufactures  and  in  trans- 
portation alone  will  not  suffice.  The  economic  structure  is 
already  topheavy  like  an  inverted  pyramid,  with  a  vast 
weight  of  cheap  manufactures  resting  on  a  slender  point 
of  dear  foods.  The  war  does  not  promise  a  sufficient  re- 
duction in  the  world's  population  to  do  much  good. 

Forced  loans  and  debasing  the  coinage  are  now  out  of 
fashion.  Of  course  there  is  always  a  small  resource  in  the 
disappearance  of  small  subsidiary  coins,  which  commonly 
occurs  in  war  time,  the  replacement  of  which  gives  a  little 
profit.  Paper  money  is  a  seductive  but  often  a  dangerous 
resort.  It  can  be  used,  within  limits  in  the  first  few  days 
of  a  war,  as  it  then  has  the  merit  of  replacing  the  money 
that  has  been  hoarded.  It  is  a  rather  desperate  resort  of 
bad  management  in  the  middle  of  a  war,  but,  of  course, 
with  failing  credit  it  may  become  the  last  resort  toward 
the  close  of  a  prolonged  war.  National  credit  is  now  so 
good  that  a  war  chest  is  not  considered  necessary.  But 
the  Julius  Tower  at  Spandau  is  said  to  have  held  $50,- 
000.000  in  treasure  for  mobilization.  Tribute  and  indem- 
nities are  incidental  results  and  cannot  always  be  counted 
on  in  advance.  Subsidies  are  now  very  much  the  fashion, 
but  depend  altogether  on  the  line-up  of  the  foes  and 
friends.  Government  enterprises  are  more  often  a  means 
of  saving  expense  than  of  a  money  revenue,  unless  they 
happen  to  be  like  Villa's  gambling  resorts. 

The  elimination  of  these  items  leaves  the  war  minister 
but  one  general  programme.  First,  to  borrow;  second,  to 
raise  new  taxes,  as  much  to  support  more  borrowing  as 
for  ready  money;  third,  to  use  paper  money  as  sparingly 
as  possible,  and  fourth,  to  resort  to  more  paper  money. 

The  main  thing  is  to  conserve  the  nation's  credit,  as 


that  is  the  main  source  of  money.  Hence  the  first  loans 
should  display  its  full  strength.  This  is  a  hard  thing  to 
do,  as  the  money  market  is  disturbed  and  panic  reigns. 
That  condition  has  to  be  remedied  first.  Fortunately  the 
indicated  remedy,  some  form  of  added  circulating  medium, 
can  also  be  used  to  raise  funds.  As  soon  as  the  banks  are 
at  all  restored  to  a  normal  condition  they  can  be  drawn 
on.  Still  it  remains  important  that  the  first  loans  should 
strengthen,  not  weaken,  the  nation's  credit.  Usually,  how- 
ever, the  first  loan  is  made  in  a  hurry  and  under  circum- 
stances that  are  not  of  the  best.  Moreover,  most  nations 
are  very  prone  to  assume  that  the  war  will  be  of  short 
duration. 

The  very  best  way  of  all  to  display  the  full  strength 
of  a  nation's  credit  is  that  of  a  popular  loan.  That  is  a 
loan  that  is  not  placed  through  the  banks,  but  offered 
broadcast  for  subscriptions.  This  opens  up  a  great  under- 
lying layer  of  lending  power  that  the  banks  do  not  so 
readily  reach. 

As  an  aside  I  should  like  to  suggest  that  it  would  be  a 
proper  feature  of  preparedness  to  have  the  plans  all  ready 
for  the  immediate  floating  of  a  popular  loan.  The  statute 
providing  for  the  loan  should  be  on  the  books  ready  and 
finished,  and  nothing  left  to  do  but  to  indicate  the  amount 
that  should  be  raised.  All  the  advertising  agencies  should 
be  selected,  the  places  for  receiving  subscriptions  desig- 
nated, subscription  blanks  ready  printed  and  bonds  en- 
graved ready  to  sign.  In  a  month  or  six  weeks  the  returns 
from  a  popular  loan  could  be  expected  to  be  coming  in. 
The  enthusiasm  with  which  every  war  is  greeted  would 
help  the  placing  of  the  loan.  The  results  would  tend  to 
steady  the  money  market. 

The  next  step  usually  considered  necessary  is  the  placing 
of  new  taxes.  At  four  per  cent  every  dollar  added  to  the 
revenues  means  $25  added  to  the  permanent  borrowing 
power.  One  of  the  greatest  handicaps  with  which  a  finance 
minister  usually  has  to  deal  is  the  slowness  with  which 


23 


new  taxes  are  voted.  In  our  Civil  War  it  was  months  be- 
fore new  taxes  were  levied.  There  is  usually  a  long  debate 
as  to  the  form  of  the  new  taxes.  Again  as  an  aside  I  would 
suggest  that  this  debate  could  take  place  years  in  advance 
of  the  declaration  of  war  and  that  as  a  feature  of  pre- 
paredness there  could  be  on  the  statute  books  an  entire 
war  tax  system  waiting  the  firing  of  the  first  shot  to  take 
effect.  All  that  Congress  would  have  to  do  on  that  date 
would  be  to  declare  the  amount  to  be  raised.  The  tax 
administrative  machinery  should  also  be  ready  to  start  on 
the  first  day. 

New  taxes  are  a  part  of  the  programme  that  is  generally 
thought  to  be  necessary.  It  is  a  part  of  the  English  theory, 
as  we  have  seen,  and  as  new  taxes  are  hard  to  get  after  the 
effects  of  the  war  are  beginning  to  be  felt  it  would  seem  to 
be  a  part  of  the  programme  that  every  nation  should  adopt. 
But  it  must  be  noted  that  the  Germans  have  a  different 
theory.  They  do  not  turn  to  new  taxation,  in  the  belief 
that  the  war  creates  disturbance  enough  without  the  dis- 
turbance to  industry  that  the  new  taxation  brings,  and  that 
as  the  credit  of  the  government  is  so  good  it  is  just  as 
well  to  wait  until  after  the  war  to  provide  for  the  expenses 
of  debt  redemption  and  interest  charges. 

Now  let  us  see  what  has  been  done  by  the  leading  coun- 
tries in  this  great  war  and  judge  them  in  the  light  of  the 
principles  just  set  forth.  First,  England.  On  August  4, 
1914,  Parliament  granted  a  war  credit  of  £105,000,000, 
and  on  August  6  authorized  treasury  notes  to  be  sold  up 
to  £100,000,000.  These  were  issued  as  needed  in  treasury 
bills,  which  were  sold  through  the  banking  agencies.  The 
terms  were  such  as  to  make  the  interest  cost  average  about 
three  and  three-quarters  per  cent.  At  the  same  time  the 
Government  received  the  power  to  issue  the  currency  notes, 
which,  as  we  have  seen,  placed  in  their  hands  the  power 
to  raise  £225,000,000.  The  only  report  that  I  have  as  yet 
happened  to  see  on  these  notes  said  that  up  to  August  26, 
1914,  there  had  been  issued  £21,535,000 ;  of  this,  £10,000,000 


24 


were  advances  to  the  banks,  subsequently  to  be  redeemed. 
How  the  other  £11,400,000  went  out  I  have  not  learned. 
Some  statements  have  been  made  concerning  these  notes 
which  are  very  hard  to  understand  and  there  seems  to 
be  an  effort  to  maintain  the  semblance  of  a  reserve  against 
them.  From  that  time  on  to  November,  1914,  England  is 
said  to  have  been  spending  at  the  rate  of  £1,000,000  a  day, 
and  to  have  ' '  lent ' '  to  her  allies,  to  the  colonies,  and  others, 
£43,000,000,  of  which  Belgium  received  £10,000,000  and 
Servia  £800,000.  By  that  date  £90,000,000  of  the  treasury 
notes  had  been  sold.  Now  ninety  days  at  a  million  a  day 
and  forty-three  million  make  in  all  £133,000,000,  which 
more  than  used  up  the  war  credit  of  one  hundred  million, 
and  left  practically  all  the  money  loaned  unaccounted  for 
by  receipts.  Where  the  rest  came  from  we  shall  not  know 
until  the  full  reports  are  published. 

By  November,  1914,  it  was  estimated  that  the  war  might 
run  on  for  two  full  years,  and  if  so  that  it  would  cost  the 
treasury  £450,000,000.  This  was  a  sanguine  estimate,  as 
will  be  seen.  So  new  loans  were  authorized  to  the  amount 
of  £350,000,000,  to  bear  interest  at  three  and  one-half  per 
cent  nominal,  and  to  be  issued  at  95,  redeemable  after 
March,  1928.  This  was  practically  a  four  per  cent  cost 
loan.  It  may  be  added  that  by  April,  1916,  by  virtue  of 
various  conversions  of  the  old  consols  and  various  refund- 
ings,  the  interest  rate  on  the  entire  debt  is  for  the  future 
on  a  cost  basis  of  not  far  from  five  per  cent.  The  Economist 
makes  the  cost  to  date  actual  at  4.36  per  cent,  as  the  earlier 
loans  did  not  cost  so  much. 

In  November,  1914,  the  first  new  taxes  were  imposed, 
and  new  ones  have  come  in  each  new  budget.  The  income 
tax,  which  had  been  running  at  rates  ranging,  on  its  two- 
fold graduated  scales,  namely  by  the  size  and  by  the  kind 
of  income,  from  three  and  three-quarters  per  cent  to  eight 
and  one-third  per  cent  of  the  taxable  portion  of  the  in- 
come, was  doubled,  and  a  supertax  was  placed  on  all  in- 
comes over  £2,500  for  all  persons  whose  income  was  above 


25 


£3,000.  The  result  was  a  rate  for  large  unearned  incomes  of 
about  thirty-five  per  cent.  Just  recently  there  has  been  a 
further  increase  in  the  rates  on  all  incomes  between  £500 
and  £2,500.  At  the  same  time  the  exemptions  have  been 
lowered,  the  £160  exemption  being  reduced  to  £130.  The 
tax  on  beer  was  raised  to  one  half-penny  a  glass,  tea  to 
threepence  a  pound.  Rapidly  other  new  taxes  have  come 
in.  The  sugar  tax  has  gone  from  Is  Wd  a  cental  to 
9s  4d  Tobacco  taxes  and  those  on  cocoa,  coffee,  chicory, 
were  first  raised  fifty  per  cent,  and  more  since  then.  Motor 
spirits  pay  threepence  per  gallon,  the  tax  on  patent  medi- 
cines is  doubled,  all  imports  pay  thirty-three  and  one-third 
per  cent  ad  valorem.  War  profits  pay  fifty  per  cent.  A 
multitude  of  new  taxes  have  been  invented  and  an  attempt 
was  made  to  raise  the  rates  of  postage  and  of  the  telegraph 
and  telephone  service.  Still  ever  new  taxes  are  being  pro- 
posed, including  a  tax  on  goods  exported.  A  penny  a 
shilling  tax  on  railway  tickets  is  among  the  latest. 

Mr.  McKenna 's  speech  of  September  21,  1915,  present- 
ing the  third  budget  of  the  war,  was  commented  on  by  the 
staid  old  sober  Economist  in  the  following  striking  lan- 
guage. "It  was  a  plain  unvarnished  statement  of  un- 
paralleled revenues,  an  inconceivable  expenditure,  and  an 
unimaginable  deficit,  followed  by  a  list  of  fresh  taxation 
which,  as  he  said,  imposed  an  unprecedented  burden  on 
the  country." 

It  was  not  long  ago  estimated  by  Mr.  McKenna  that  by 
March  31,  1916,  the  dead  weight  of  debt,  old  and  new, 
would  be  £2,200,000,000,  including  £423,000,000  lent  to  the 
allies  and  colonies.  But  the  latest  report  I  have  makes 
the  total  $17,500,000,000.  The  revenues  as  estimated  at 
various  times  went  from  198  million  pounds  before  the 
war  to  227,  then  to  305  and  506.  But  these  estimates  were 
not  realized.  In  fact,  the  results  have  not  yet  reached  us. 
In  April,  1916,  Mr.  McKenna  claimed  £300,000,000  a  year 
in  new  taxes.  The  spending  is  now  $25,000,000  per  day, 
and  interest  alone  calls  for  two-thirds  of  the  new  revenues. 


Criticism. — There  seems  to  have  been  a  great  deal  of 
disorder  and  confusion  until  the  third  budget,  which  did 
something  to  set  matters  in  order.  The  results  of  Eng- 
land's borrowings  have  not  been  bad  in  themselves,  as  the 
cost  shows.  But  she  has  done  little  to  reach  the  lower  layers 
of  lending  power  and  has  therefore  not  loosened  up  as 
much  as  she  might  have  the  foreign  investments  held  in 
England,  which  would  have  helped  the  restoration  of  the 
exchanges,  as  well  as  facilitating  war  loans.  "While  she 
has  done  much  in  the  direction  of  increased  taxes,  the  rate 
of  spending  has  been  such  that  the  ratio  of  taxes  to  bor- 
rowing is  nearer  one  in  ten  than  the  traditional  one  in 
three.  Her  gravest  blunder  was  to  seek  money  abroad  be- 
fore she  had  demonstrated  on  the  same  issue  that  it  could 
be  raised  at  home,  and  at  what  rates.  Her  venture  into  the 
New  York  market  was  disastrous.  Her  credit  has  been 
hurt  by  each  successive  loan. 

The  London  Economist  says  that  Germany  has  followed 
a  well  thought  out  plan.  It  has  been  exactly  what  has 
been  set  forth  in  the  books  as  her  plan  for  years  past,  in- 
deed since  1870.  For  the  first  three  months  war  was  con- 
ducted on  money  raised  through  the  Reichsbank.  The  pro- 
cedure was  to  increase  the  gold  reserves  and  issue  notes  at 
practically  three  for  every  one  of  gold,  redeemable  at  the 
bank  in  regular  banking  fashion.  These  were  advanced 
to  the  government  and  were  funded  in  September,  1914, 
in  four  and  five-year  treasury  notes,  and  at  the  same  time 
an  eight-year  popular  loan  was  offered.  This  loan  was  at 
five  per  cent  nominal  and  was  offered  at  97%,  or  on  a 
five  and  five-eighths  per  cent  basis.  The  interest  rate  is 
purposely  high  on  the  theory  that  it  is  better  to  make 
sure  of  calling  out  the  funds  needed  and  that  refunding 
after  the  war  can  be  made  effective  to  reduce  the  costs. 
The  first  one  was  a  popular  loan  of  $1,115,000,000  and 
reached  1,177,235  subscribers,  thus  averaging  less  than 
$1,000  apiece.  Of  these,  926,059  were  people  of  such  modest 
means  that  they  took  sums  under  $500  each.  The  second 


27 


loan,  of  $2,265,000,000,  in  March,  1915,  was  also  at  five  per 
cent  nominal  and  was  placed  at  981/2,  or  on  a  five  and 
three-eighths  per  cent  basis.  This  reached  2,691,060  sub- 
scribers, and  of  these  2,113,220  took  less  than  $500  each. 
The  third  loan,  September,  1915,  was  for  $3,025,250,000, 
and  reached  3,551,746  subscribers,  2,883,799  of  whom  took 
less  than  $500  each.  Of  the  nearly  10,000,000  certificates 
required  for  these  popular  loans,  2,000,000  are  for  less 
than  $25  each.  It  is  interesting  to  note  that  the  numbers 
of  those  who  could  never  be  reached  by  bankers  or  syndi- 
cates has  grown  with  every  loan  and  that  the  amounts 
required  from  the  large  moneyed  institutions  to  fill  out 
has  not  been  one-sixth  of  the  whole.  The  fourth  loan  is 
offered  at  981/£,  with  valuable  conversion  features,  and 
figures  about  five  and  one-quarter  per  cent  cost.  Measured 
by  costs  and  by  the  number  of  participants,  the  credit  has 
improved  by  use. 

The  empire  has  levied  no  new  taxes  of  any  consequence. 
What  the  several  states  of  the  empire  may  have  done  is 
not  reported.  A  war-profits  tax  after  the  war  is  promised. 
But  as  prices  are  regulated  there  may  not  be  any  to  tax. 
The  absence  of  taxes,  it  is  claimed,  has  facilitated  placing 
the  popular  loans. 

Criticism. — The  no-tax  policy,  which  is  in  part  a  re- 
sult of  the  limited  powers  of  the  empire  as  against  those 
of  the  constituent  states,  is  certainly  debatable.  To  pay 
interest  out  of  borrowed  money  requires  grit.  As  against 
fiat  money,  new  circulation  regulated  by  banking  principles 
has  much  to  commend  it.  How  heavy  the  cost  of  maintain- 
ing the  gold  reserve  for  this  purpose  has  been  remains  to 
be  learned.  Germany's  banking  facilities  seem  to  offer 
large  powers  of  liquidating  the  people's  assets  and  there 
seems  to  be  no  limit  to  their  lending  power  short  of  their 
entire  capital  and  capitalized  earning  powers. 

So  much  for  the  work  of  the  finance  departments.  There 
remains  to  consider  the  costs  of  war  in  the  broader  aspects ; 
in  interruption  of  production,  destruction  of  property, 


28 


human  life,  and  of  ships  and  their  cargoes,  decrease  in 
the  stock  of  foods,  metals  and  other  raw  materials,  the 
stoppage  of  investments  and  betterments,  the  diminution 
of  future  trade  and  all  the  other  dire  results. 

These  are  variously  estimated,  but  there  are  so  many 
uncertainties  in  the  estimates  that  the  personal  bias  of 
the  statistician  who  makes  them  often  vitiates  the  com- 
parisons. The  Crammond-Eossiter  estimates  are  those 
most  frequently  relied  upon.5  Corrected  to  date,  these 
seem  to  point  to  a  total  loss  for  two  years  of  war  and  for 
demobilization  of  not  less  than  $100,000,000,000,  excluding 
any  money  estimates  of  the  loss  of  life. 

Measuring  human  life  in  money  is  poor  business  at 
best,  and  is  statistically  full  of  assumptions  and  hypotheses. 
The  usual  basis  is  to  take  the  average  earnings  of  a  man 
in  the  years  of  his  productive  life  and  arrive  at  their  pres- 
ent cash  value  on  an  assumed  expectation  of  life  for  the 
average  man.  It  will  be  readily  seen  that  this  is  full  of 
uncertainty.  Among  the  various  estimates  that  of  the 
London  Economist 6  seems  the  most  reasonable.  That  gives 
a  total  loss  in  killed  and  permanently  incapacitated  of 
4,000,000  men.  The  capitalized  value  of  these  lives  is 
about  $8,000,000,000,  or  about  four  per  cent  of  the  cap- 
italized value  of  all  virile  producers  in  the  countries  con- 
cerned. If  we  cut  out  the  money  values  the  result  in  ratios 
will  be  the  same. 

More  interesting  is  the  study  of  the  replacement  of 
the  life  losses.  This  also  involves  a  number  of  assump- 
tions. The  males  born  in  the  belligerent  countries  in  the 
ten  years  before  the  war  exceeded  those  dying  by  about 
23,000,000,  or  an  average  gain  in  males  of  about  2,300,000 
per  annum.  At  that  rate  the  increased  death  rate  due  to 
war  would  equal  the  increase  in  males  in  a  period  of  about 
one  and  three-fourths  years.  In  other  words,  in  spite  of 
the  war  losses  the  male  population  would,  if  the  old  birth- 


sAmerican  Economic  Beview,  Supplement,  March,  1916.  p.  94  ff. 
e  War  Supplement,  December,  1915. 


29 


rate  continued,  increase.  It  is  probable,  however,  that  the 
birth  rate  will  be  affected  by  the  war,  especially  as  the 
losses  are  among  the  most  virile  males.  That  is  all  a  mat- 
ter of  speculation  and  the  ratios  are  very  different  in  the 
different  countries.  Thus  in  France  there  is  no  such  rate 
of  replacement.  As  an  interesting  sidelight,  there  are  (if 
these  figures  are  at  all  reliable)  more  men  growing  up  into 
the  fighting  age  each  year  than  have  been  killed  off.  This, 
however,  again  does  not  apply  equally  in  all  countries;  in 
France  particularly  the  crop  of  young  males  is  small. 

It  has  been  suggested  that  light  may  be  thrown  on  the 
cost  of  the  war  by  the  rise  in  prices.  This  is  a  very  un- 
certain field  of  investigation  at  present  for  the  reason  that 
there  are  two  different  causes  for  the  increase  in  prices. 
One  is  the  actual  scarcity  of  commodities,  the  other  is 
the  inflation  of  the  medium  of  exchange,  money  and  credits. 
How  much  is  due  to  each  of  these  causes  is  difficult  to 
ascertain  until  we  have  more  facts  than  are  now  available. 
The  famous  old  Economist  index  number  has  now  passed 
the  4,000  mark;  its  revised  1905  base  is  2,200,  and  hence 
the  level  of  prices  so  measured  is  nearly  one  hundred  per 
cent  higher  than  it  was  before  the  index  started  in  1905, 
and  is  fifty-seven  per  cent  above  the  level  of  July,  1914. 

In  conclusion  I  wish  to  recapitulate  Professor  Kem- 
merer's  offsets  to  the  dark  side  of  the  picture.7  He  points 
out  that  the  living  costs  of  the  troops  are  low,  compared 
with  those  of  times  of  peace.  Luxury  and  extravagance 
are  curtailed,  both  for  those  in  the  field  and  those  at  home. 
Much  of  the  waste  that  goes  on  in  times  of  peace  is  cut 
out.  The  productive  power  of  the  nations  is  exerted  more 
efficiently  than  at  other  times.  There  is  less  leisure,  less 
idleness,  less  vice,  more  health  and  vigor  and  less  sickness 
and  weakness.  War  is  playing  havoc  with  bad  things  as 
well  as  with  good  things. 

It  is  breaking  down  outworn  economic  customs,  antisocial 
vested  interests,  and  antiquated  methods  of  production.  War 

^American  Economic  Review,  Supplement,  March,  1916,  p.  120. 


30 


clears  the  decks,  as  it  were,  and  in  this  clearing  process  there 
are  swept  away  many  things  which  long  since  have  become  ob- 
stacles to  progress.  Many  an  ugly  and  antiquated  building  which 
has  been  destroyed  by  war  will  be  replaced  by  a  sightly  and 
modern  one,  many  a  narrow  street  will  be  replaced  by  a  broad 
one;  in  like  manner  the  democracy  of  the  trenches  will  remove 
many  class  prejudices,  to  be  replaced  by  stronger  bonds  of  social 
sympathy  between  industrial  classes. 

These  economic  gains  will  not  cover  the  economic  costs 
of  war,  but  they  will  to  a  certain  extent  offset  them. 


ADDENDA 

I.  DIRECT  COST  OF  WAR  TO  MARCH  31,  1916 

United   Kingdom £2,025,000,000  $10,000,000,000 

France    1,755,000,000  8,700,000,000 

Russia    1,200,000,000  6,000,000,000 

Italy  225,000,000  1,100,000,000 

Belgium    and    Servia 45,000,000  220,000,000 

Entente   total £5,250,000,000  $26,020,000,000 

Germany    £2,270,000,000  $11,300,000,000 

Austria-Hungary   1,100,000,000  5,400,000,000 

Turkey    and    Bulgaria 30,000,000  150,000,000 

Alliance  total £3,400,000,000  $16,850,000,000 

All   belligerents £8,650,000,000  $42,870,000,000 

From  the  London  Economist  War  Supplement,  December  18,  1915. 

II.  DIRECT  AND  INDIRECT  COST  OF  WAR  TO  JULY  31,  1915 

Belgium $2,364,390,000 

France  6,504,624,000 

Russia   8,346,000,000 

Great    Britain 4,475,880,000 

Austria-Hungary    6,133,320,000 

Germany  9,214,560,000 

Italy    1,158,000,000 

Turkey,  Servia,  Bulgaria  and  neutrals....  1,500,000,000 


Total   $39,696,774,000 


31 


Crammond-Kossiter  estimates. 

Notes:  The  above  contains  no  figures  for  loss  of  lives  or  dis- 
ability. 

The  Economist  estimates  the  same  items  at  $42,000,000,000, 
but  has  a  very  different  distribution. 

The  total  direct  and  indirect  costs  to  all  belligerents  to  Au- 
gust, 1916,  will  reach  $100,000,000,000. 


III.  Loss  OF  HUMAN  CAPITAL — FIRST  Two  YEARS 

Dead  and 
Incapacitated 

United  Kingdom 235,000 

France    515,000 

Eussia  980,000 

Italy  140,000 

Belgium  and  Servia 130,000 


Entente  total 2,000,000 

Germany    990,000 

Austria-Hungary   840,000 

Turkey  and  Bulgaria 150,000 


Value 

per  Head 

Loss 

$3000 

$  705,000,000 

2500 

1,287,000,000 

1375 

1,347,000,000 

1750 

245,000,000 

1750 

227,000,000 

$1910 

$3,811,000,000 

$2250 

$2,227,000,000 

2000 

1,680,000,000 

1375 

206,000,000 

$2070 

$4,113,000,000 

$1990 

$7,924,000,000 

Alliance  total 1,980,000 

All   belligerents 3,980,000 

Economist  estimates. 

Bossiter  estimates  capital  value  of  all  virile  aged  males  before 
war  at  $235,000,000,000. 

Hence  loss   equals  3.4  per  cent. 


IV.  NATIONAL  WEALTH  IN  1914  OF  THE  POWERS  NOW  AT  WAR 

Great  Britain $  88,060,000,000 

Germany  83,250,000,000 

Eussia   60,160,000,000 

France     59,000,000,000 

Austria    55,580,000,000 

Italy    20,000,000,000 

Belgium    12,000,000,000 


Total   $378,050,000,000 

Notes:     These    are    the    Crammond-Eossiter    estimates.      The 
Economist  total  for  the  countries  in  Table  IV  is  $397,000,000,000. 


32 


V.  WAR  LOANS  OF  PRESENT  WAR  TO  DECEMBER,  1915,  AND  AGGREGATE 
*,         DEBT  TO  SAME  DATE 


Great  Brita 
Germany    .. 

New 
in  $8,077,320,000 

All, 
Old  and  New         Per  Capita 

$11,269,768,463*         $242 
13,135,000,000             177 
;87L13,792,000             159 
8,776,815,000            220 
„  8,16^00,000               57 
^  3,115,920,000               87 

7,140,000,000 

Austria    ..... 
France  

f.  4,308,992,000 
'3,871,940,000 

[Russia 

3,570  000  000 

Italy  

620,755,550 

Total    $27,589,007,550  $51,573,995,463 

*  England's  total  to  May,  1916,  is  $17,500,000,000. 


$134 


Crammond-Kossiter  estimate.     Note   exchange  has  been   com- 
puted at  the  U.  S.  Mint  ratio. 


VI.  DEBTS  OF  THE  GREAT  NATIONS  BEFORE  THE  WAR 

Reported 

Debt, 
Nations —       Millions 

Austria  $3,752 

France  6,284 

Germany   4,913* 

Italy  2,706 

Japan  1,242 

Eussia    4,554 

England     3,486 

U.  S 1,000 

*  Mainly  railroad 

From  Plehn,  Government  Finance. 


Debt 

Annual 

Annual 

Debt 

Pop. 

per 

Revenues, 

Debt 

times 

Millions 

Capita 

Millions 

Charges 

Revenues 

49.4 

$75.95 

$1,142.5 

$156 

3.3  fold 

39.3 

159.87 

914.6 

186 

6.9    " 

64.9 

75.70 

2,368.1 

219 

2.1    " 

33.9 

79.84 

512.0 

104 

4.1    " 

52.2 

23.79 

292.2 

71 

4.3    " 

160.1 

28.45 

1,674.0 

207 

2.7    " 

45.0 

77.46 

918.8 

119 

3.8    " 

94.8 

10.55 

1,000.0 

23 

1.0    " 

debts 

of  the  kingdoms. 

THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN  INITIAL  FINE  OF  25  CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 


10  1935 


1  1935 


